Keeping in mind the growth and expansion of the Indian economy a need was felt for the introduction of a new corporate vehicle which could provide for the benefits of a partnership as well as ensure restricted personal liability. Thus the parliament enacted the Limited Liability Partnership Act in 2008
Limited Liability Partnership
In a limited liability partnership one partner is not responsible for the misconduct or negligence of the acts caused by the other. A limited liability partnership although exhibits all the features of a partnership in the normal course but under its special provision, the concept of limited liability partnership gives the latter an upper hand over the former
LEGAL ENTITY
In India LLP is a body corporate formed and incorporated under the LLP Act, which is a distinct legal entity separate from that of its partners. The act provides exhaustive features such as competency of parties to form and draft a partnership agreement, extent of liability, penalties etc.
SECTION 3(1) of the Limited Liability Partnership Act,2008
A limited liability partnership is a body corporate formed and incorporated under this act and is a legal entity separate from its partners
For the purposes of taxation LLP’s will be treated as a firm as defined in the Indian Partnership Act, 1932
Section 3(c) of the Finance (No. 2) Act,2009
(for clause (23), the following clause shall be substituted with effect from the 1st day of April, 2010, namely :—
‘(23) (i) “firm” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009);
REGISTRATION
It is compulsory for a limited liability partnership to get registered as per the provisions of the Limited Liability Partnership Act, 2008 and it is a body corporate and incorporated under this act
FINANCIAL DISCLOSURES
It is also compulsory for a Limited Liability Partnership to file within the prescribed time the statement of accounts pursuant to sub section (2) and sub-section (3) of section 34 of The Limited Liability Partnership Act, 2008
Section 34(2)
Every limited liability partnership shall, within a period of six months from the end of each financial year, prepare a statement5 of account and solvency for the said financial year as at the last day of the said financial year in such form as may be prescribed and such statement shall be signed by the designated partners of the limited liability partnership
Section 34(3)
Every Limited liability partnership shall file within the prescribed time, the statement of accounts and solvency prepared pursuant to sub section (2) of section 34 with the registrar every year in such form and manner and accompanied by such fees as may be prescribed
EXTENT OF LIABILITY OF THE LIMITED LIABILITY PARTNERSHIP
The whole concept behind enacting the Limited Liability Partnership Act, was that the limited liability partnership shall not be held liable for the unauthorized act done by any other partner in the limited liability partnership
Sections 27(1), of the limited liability act, 2008 covers the following point.
S.27 (1)
A limited liability partnership is not bound by anything done by a partner in dealing with a person if-
a) The partner in fact has no authority to act for the limited liability partnership in doing a particular act
b) The person knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership
EXTENT OF LIABILITY OF A PARTNER OF THE LIMITED LIABLITY PARTNERSHIP
Section 28(1), Section 28(2) covers this point
S.28 (1)
A partner is not personally liable, directly or indirectly for an obligation referred to in sub-section (3) of section 27 solely by reason of being a partner of the limited liability partnership.
S.27 (3)
An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership
S.28 (2)
The provision of sub-section (3) of section 27 and sub section(1) of this section shall not affect the personal liability of a partner for his own wrongful act or omission but a partner shall not be personally liable for the wrongful act or omission of any other partner of the limited liability partnership
Partnership
Partnerships in India are governed by the Indian Partnership Act, 1932.
A “partnership” according to section 4 of the Indian Partnership Act-
“Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”
LEGAL ENTITY
A partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm’s property or firm’s assets all that is meant is property in which all partners have a joint or common interest. Even registration of a partnership firm does not mean that it becomes a distinct legal entity
For tax law, income-tax as well as sales tax, partnership firm is a legal entity.
REGISTRATION
Registration of partnership is not compulsory in India as the law is silent on the fact and the Indian partnership Act, 1932 provides for a section which deals with the effects of non-registration.
Section 69
EFFECT OF NON-REGISTRATION.
(1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court by or on a behalf of any persons suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm : Provided that the requirement of registration of firm under this sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives of the deceased partner of a firm for accounts of the firm or to realise the property of the firm.
(2) No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.
FINANCIAL DISCLOSURES
Financial disclosures are not required to be done by partnership firms as the law is silent
EXTENT OF LIABILITY
The extent of liability of the firm as well as other partners is pointed out in the following sections
LIABILITY OF A PARTNER FOR ACTS OF THE FIRM.
Section 25
Every partner is liable jointly with all the other partners and also severally, for all acts of the firm done while he is a partner
LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER.
Section 26
Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner.
Section 27
LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS.
Where –
(a) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or
(b) a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss.
Thus under the Indian Partnership Act, the concept of liability is strict and absolute and it will cover all the partners of the firm as well as the firm itself.
Broad distinction between Partnership Firm and Limited Liability Partnership-
|
S.No. |
Nature |
Partnership Firm |
Limited Liability Partnership |
|
1 |
Legal entity |
A partnership Firm is not a legal entity. |
A limited liability partnership is a legal entity. |
|
2 |
Liability |
Every partner is jointly and severally liable and the firm is also liable for the wrongful acts or omissions of any partner. |
The limited liability partnership is not liable for the acts done by the partners outside the scope of their authority and the partners are also not responsible for the wrongful acts of any other partner. Similarly any obligation of the Limited Liability partnership is the sole obligation of the Limited Liability Partnership and not of its partners personally. |
|
3 |
Taxation |
For the purposes of taxation a partnership shall be treated as a separate legal entity |
For the purposes of taxation the LLP’S will be treated as a “firm” as defined in the Partnership Act,1932 |
|
4. |
Registration |
Registration of a partnership firm is not compulsory as the law is silent on it |
Registration and incorporation of a LLP is compulsory as per the LLP Act itself |
|
5. |
Financial Disclosures |
The law being silent on partnership firms, it is not mandatory to file disclosures |
Mandatory to file disclosures by Limited Liability Partnership as per the LLP Act itself |
Conclusion
Hence as per the above comparisons it is best to say that a limited liability partnership not only renders protection to the partners but also retains all the benefits of a partnership. Although the traditional partnership holds one advantage that it is not compulsory for a partnership to get registered before any statutory authority while on the other hand a Limited Liability Partnership has to get registered under the Limited Liability Act, 2008, the process of which may be cumbersome. Still in my opinion the balance is tilted in the favour of the latter.
